OVERVIEW OF KEY CONCEPTS AND TERMS
1. Key Concepts
a. Sole Proprietor: A business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity
i. Loan from bank→ May still operate as sole proprietor
ii. Investors→ No longer a sole proprietor
1. Becomes unincorporated or incorporated entity depending on how relationship is created
b. Partnership (Unincorporated): Voluntary association of two or more persons who jointly own and carry on a business for profit
i. Easiest business entity to form
ii. Unlimited liability for partners
1. If you are going to be exposed to high level of liability, may want to consider limited liability
c. Corporation (Incorporated): Entity (usu. a business) having authority under law to act as single person distinct from shareholders own it and having rights to issue stock and exist indefinitely
i. Most popular business form in U.S.
2. Key Terms
a. Debt: Specific sum of money due by agreement or otherwise
b. Creditor: One to whom a debt is owned
c. Equity: Ownership interest in property, esp. in a business
i. Whatever owner of business “owns”/their share is equity
d. Shareholder: One who owns or holds a share or shares in a company
i. Typically, shareholders are owners and residuals owners
e. Owner: One who has the right to possess, use, and convey something
f. Residual Owner: One who will reap the marginal dollar of the firm’s gain or suffer the marginal dollar of its losses
I. AGENCY
1. Elements of Agency Relationship: (1) Must be consensual, (2) must involve 3 parties
a. Will always be a three-party relationship → If all you have is a two-person relationship, that is a service provider-customer relationship (not agency) b/c there is no third party that agent is acting on your behalf
P → A
↓
T
i. Principal: Party for whom the act is being done; party that stands to benefit
ii. Agent: The doer; party doing the act for/on behalf of the principal
iii. Third Party: Target of the agent’s conduct; ≠ direct party to the principal-agent relationship
b. Agency relationship must have (1) a Principal who manifests assent (a) to have someone act on behalf and (b) subject to control and (2) Agent consent
i. R2d §1: A manifestation of consent by one person (principal) that another person (agent) act on principal’s behalf subject to principal’s control
Three Step Analysis to Determine if Agency Relationship is Formed:
Has P consented that the A will act on their behalf?
Has P consented that the A will be subject to their control?
Has A consented to act on behalf of and be subject to P?
ii. R3d §1.01: An agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to act
1. “Fiduciary Relationship”: Someone who has a duty of loyalty → as a general matter, fiduciary signifies that agent must act loyally, in the principal’s interest as well on principal’s behalf
c. Necessity of Formal Agreement: No formal K required but still need agreement (i.e., “meeting of the minds” between P and A)
i. Courts look at the substance of the relationship → You can call it whatever you want, but courts will decide if its agency using the 3 part test (Doty)
1. Does not have to be in writing
2. Do not have to say “magic words” → Consent may be shown by written or spoken words or other conduct (R3d § 1.03)
d. Common issues: Look to agency triangle
i. Does an agency relationship exist between P&A?
ii. What consequences follow to P from interaction between A&T?
CASES
Gorton v. Doty: Δ, a teacher, volunteered use of her car to the school’s coach (Driver, “D”) to transport students to football game. Δ received no compensation for use of the car but made its use conditional to agreement that D drive. П was seriously injured in an accident after riding in car with D (who was killed). Jury awarded damages to П against Δ.
o Is there an agency relationship? YES; there was an agency relationship between ∆ and D, and thus the ∆ is liable
§ The agency relationship was formed b/c: (1) by telling D he could drive her car, ∆ manifested her intent for him to be her agent; (2) when ∆ told D he must drive it, he became subject to her control; (3) when D drove it, he gave his consent.
o How would you advise Doty in the future?
§ Could create lending relationship through formal agreement
· Would make П’s case difficult but just b/c parties clearly state they are not creating agency relationship, ≠ mean that court will ≠ apply agency rules
o R3d § 1.02: Whether a relationship is characterized as agency in an agreement between parties or in the context of industry or popular usage is not controlling
§ Don’t place conditions on who drives b/c court relied on control issue
· Control under R2d was very ambiguous and very broad
· R3d has tried to reign concept of control in and make more narrow so mere influence/encouragement ≠ control
o Comments: Principal’s right of control in agency relationship is narrower and more sharply defined concept than domination or influence more generally
A Gay Jenson Farms v. Cargill: Farmers (F) sold grain under grain contracts to Warren (W) who was supposed to pay F for grain. W had separate relationship with Cargill (Δ) who loaned $ to W and had right of first refusal to grain that W was selling. W ≠ pay farmers for grain so F sued Δ → People look for deep pockets b/c W had no money since he was bankrupt. Prior to suing Δ, F had no relationship w/Δ → Δ was not named in contracts, etc.
o Is there an Agency Relationship? YES → By its control and influence over W, ∆ became principal with liability for transactions entered into by W
§ W used Δ’s forms, Δ had substantial control over W’s operation, gained benefit from W’s operation (grain) so can imply that W acted on Δ’s behalf
§ Focused on Control through R2d § 14 O: Creditor becomes Principal at that point at which it assumes de facto control over the conduct of debtor
· See page 10-11 for factors
· Each element may be common in creditor-debtor relationship but when you take them all together, must hold Δ liable for ∏’s losses
o Was there sufficient control? Very few courts followed Cargill → Criticized b/c used control as way to get Δ to pay
§ R3d posits agency in the creditor-debtor scenario as the very rare example rather than the rule → need more than control, must have elements of agency
2. Actual Authority: P is liable for cause of action b/c of actual authority it gave to A
a. Definition (R3d § 2.01): An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act
i. Focus on the P-A relationship
b. Creation of Actual Authority (R3d § 3.01): Actual authority is created by principal’s MANIFESTATION to an agent that, as reasonably understood by agent, expresses principal’s assent that the agent take action on the principal’s behalf
i. Express: Created by expressed
e memories to be delivered to customer w/buddy, K, Δ’s salesman, and K’s supervisor, Mueller (M). П received written document K detailing agreement. П signed and sent back but never received signed copy from Δ. M sent office memo indicating sale and that K would be handling all matters. K sent П letter confirming delivery. Δ then argued ≠ contract b/c K ≠ authority to make the deal.
o Apparent Authority: П relied on this b/c even though dealing with agent, not sure if agent has authority to make deals of this kind
o Holding: Enforceable contract b/c K had apparent authority to accept П’s offer to purchase on behalf of Δ
§ Reasonable for П to expect K to have authority to make sales as a salesperson and received letter confirming sale
o Manifestation: Δ issued interoffice memos indicating (1) sale and (2) K’s authority to handle such matters
4. Undisclosed Agent Authority → Looks at relationship between A&T
a. Undisclosed Principal (R3d § 1.04): A principal is undisclosed if, when an agent and 3d party interact, the 3d party has no notice that the agent is acting for the principal
b. Catch-All Type of Power: 2 classic situations in which this is used:
i. Undisclosed Ps
1. What’s the scope of A’s authority in these cases? P is liable for all the acts which are within the authority usually given to an A of that character
ii. A exceeds their authority
CASE
Watteau v. Fenwick: H sold hotel to Δ but continued as manager, kept name on door, and kept all licenses. H had Δ’s authority to purchase only certain items but ordered (but did not pay for) other items from П, outside Δ’s express authority. П then sued Δ for payment.
o Types of Authority
§ H ≠ have actual authority b/c of restrictions placed on agency
§ H ≠ have apparent authority b/c no reasonable expectation on H’s part
§ Would be reasonable for 3d party to think that H had authority to buy supplies b/c used to be and acted as owner
· Nobody knew that P-A relationship existed
o Rule: “The principal is liable for all the acts…which are within the authority usually confided to an agent of that character
§ Undisclosed principal is subject to liability to 3d party who is justifiably induced to make a detrimental change in position by an agent acting the P’s behalf and w/o actual authority if the P, having notice of the agent’s conduct and that it might induce others to change their positions, did not take reasonable steps to notify them of the facts
· UP ≠ rely of instructions given to agent that qualify or reduce agent’s authority to less than the authority a 3d party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed – R3d § 2.06
o Undisclosed principal is liable for acts of agent done on his account, if usual or necessary in such transactions, although forbidden by the principal – R2d § 194
o Holding: YES → Δ is liable for П’s contract b/c, even though undisclosed, a principal is liable for agent’s actions
§ It would be reasonable for agent to purchase cigars w/principal’s authority in this circumstance
There is no law that requires principal to disclose its existence
